Can A Company Be Declared Bankrupt For Inability To Pay License Fee? NCLAT Sets A Firm Precedence

For property owners who have rented out their commercial premises to companies on the basis of a license agreement, fighting long civil proceedings for recovery of unpaid licence fees will soon become a thing of the past. On July 5, the National Company Law Appellate Tribunal (NCLAT) ruled that if companies defaulted in the payment of the rent amount, as agreed upon in a licence agreement, the owner can file a case and initiate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).

“The claim of Licensor for payment of license fee for use of Demised Premises for business purposes is an ‘operational debt’ within the meaning of Section 5(21) of the Code,” said the judgement delivered by a five-member bench headed by NCLAT chairperson Justice Ashok Bhushan.

Legal experts say that this will prevent companies from defaulting on timely payment of the license fee, or rent, as doing that might lead to a corporate insolvency resolution process (CIRP) under the IBC.

The Case Behind The Ruling

The verdict holds significance as different benches of the NCLAT have had contradictory views on the same issue in the past and it was important for the full bench to bring in unanimity and settle it for future cases.

The latest judgement is about a dispute between Metro Jet Airways Training Private Limited (MJATPL) and Jaipur Trade Expocentre Private Limited (JTEPL) over payment of licence fee.

In 2017, JTEPL had leased out its 31,000 sq. ft. commercial premise in Jaipur to MJATPL to run an educational establishment under a license agreement for five years at a monthly license fee of Rs 4 lakh plus government taxes. By 2019, when the total dues went over Rs 1.3 crore, JTEPL, acting as an operational creditor, sent a demand notice to MJATPL, the corporate debtor, under Section 9 of the IBC.

When MJATPL did not reply to the notice, JTEPL filed an application in the National Company Law Tribunal's Jaipur bench against MJATPL for the initiation of CIRP. After hearing both the parties, the adjudicating authority held that JTEPL could not invoke the IBC law and ask for relief under it.

Further, the bench said that the claim, arising out of the grant of license to use the immovable property, does not fall in the category of goods or services under the IBC and, hence, cannot be termed operational debt. As per Section 5(21) of the IBC, operational debt means a claim in respect of the provision of goods or services. 

JTEPL appealed against the order and the case was referred to the five-member NCLAT bench. Arguing its case, JTEPL cited two previous judgements and said that it provided a “service” to MJATPL under the license agreement and the debt was an operational debt under the various provisions of the IBC law.

MJATPL, on its part, also produced two previous judgements, delivered by different benches of the NCLAT, and argued that the license agreement between the parties does not come within the purview of “operational debt”. The company's lawyer argued that the alleged dues of rent from the JTEPL were a subject matter of the civil suit between the parties and the present appeal, with IBC in the picture, was not maintainable.

Looking at the issue, the five-member bench examined the key question of whether the license fee, which is claimed to be due from the corporate debtor, is an “operational debt” within the meaning of Section 5(21) or not. After a detailed examination of the relevant legal provisions and the facts of the case before it, the bench held that the previous judgements did “not lay down the correct law”.

Deterrent In Place

Nishant Srivastava, founder and managing partner, Actus Legal, says that after considering various relevant judgments and precedents, the five-member NCLAT bench has rightly concluded that a debt pertaining to unpaid license fee was fully covered within the meaning of “operation debt” under Section 5(21) of the IBC.

“There is no intelligible differentia to hold that a lessor is, in any way, lesser than or stands at a different footing from any other operational creditor when it comes to such lessors’/licensors’ claim to be treated as “operational debt” or for the purpose of triggering the insolvency resolution process,” he added.

Agrees Yogendra Aldak, partner, Lakshmikumaran and Sridharan Attorneys. “This decision will enable the entities involved in the business of leasing infrastructure facilities to initiate action under the code against non-paying tenants,” he adds.

Aldak also praises the efforts taken by the NCLAT bench to arrive at the correct decision by referring to the definitions provided under Central Goods and Services Tax Act, 2017 and Consumer Protection Act, 2019, for the purposes of interpretation of definitions of “goods” and “services”. “I think this judgement will act as a deterrent for many companies that wilfully default on paying the amount of the licence agreements and frustrate the interest of the rightful owners,” says advocate Venket Rao, founder, Intygrat Law Offices, and a well-known expert on insolvency laws.